“Volatile” is the perfect word to define India’s current financial market scenario. From the month of August, when we had a fledgling market, till today, the fluctuations have shaken the confidence of many investors. 4th October saw an 806-point drop in the Sensex, which was the fifth biggest single day loss, registered by the BSE benchmark, in the past five years. And the reasons that have contributed to this are not only worrying in nature but can have lasting impacts on the economy as well.
The majority of these are,
- The Infrastructure Leasing & Financial services (IL&FS) Crisis
- Rising bank defaulters
- Weakening rupee
- Consistent drops in Sensex
All this might prompt you to greatly worry about your investments. Now, this is a disturbing situation, particularly for the new investors, the corrections for whom, have been nothing less than shocking. And in all this frenzy, they might end up making some really unhealthy financial decisions for yourself. The reason being whenever the markets tumble, the newbie investors almost always face this dilemma of whether to stop their investments. And they almost always end up with the wrong decisions – some stop their SIPs altogether while some others redeem their investments, in a rush, to avoid further losses.
So the primary question that might be ringing in most of the investors’ heads today is, “should I stop my SIP?”
Well, to give you a straightforward answer, No. you should not!! Because if you stop your SIP when the markets are down, you lose the opportunity for rupee cost averaging.
Now what is rupee cost averaging?
Rupee cost averaging is the concept of investing a fixed amount of money at regular intervals, ensuring that you buy more shares when prices are low. A fixed schedule (weekly, monthly or quarterly) helps you in avoiding that complex theory of figuring out the exact best time for investing (which is anyway a myth). Hence, this reduces the results of short-term market fluctuation on your investments.
On this, Samant Sikka – CEO of Sqrrl, says, “Rupee cost averaging is the basis of SIPs and that only works when a person continues to invest even when the markets are low. Stopping the SIP investments in the situation of a volatile market, might result in an important averaging opportunity missed, which can reduce your SIP returns and can effect long-term performance.”
The market is bound to be volatile as it’s driven by a lot of factors – investor sentiments, general optimism/pessimism, inflows and outflows of money, etc. But what you, as an investor, should focus on is your intent behind being in the market – generating wealth over an extended period of time. Your purpose behind investing should remain constant. Always.
Also, just on the basis of one year, you cannot decide if your investment has turned sour, as it’s too short a sample size. You should give your SIP 3-5 years of time, before doing any evaluations. And if then you see that the scheme has under performed its benchmark, even over this long a period, you can plan to maybe shift to some other scheme. Ideally, it’s suggested that investors should link their SIPs to their goal(s) and shouldn’t discontinue the SIP unless the goal(s) has been realized.
And a dip in the market is exactly the time to bank upon. During these times, plan on buying more units from the best SIP plans, as obviously, they will be priced low and when the market regains, you can sell them, now at a higher cost. And this is actually the whole idea behind investing – the “buy low, sell high” mentality.